Volume, the limits of indicators and overfitting
How volume indicators work, why every indicator is derived from price and adds no magic, and how stacking indicators leads to overfitting.
You have now seen several popular indicators. Before using any of them, it is worth understanding what they really are, and the trap that catches many hopeful traders.
Volume bars show how much was traded each period. A common addition is a moving average of volume, for example a 20-day average, so you can tell whether today's activity is above or below normal. Another well-known tool, On-Balance Volume (OBV), adds the day's volume when the price closes up and subtracts it when the price closes down, creating a running total.
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